View the work we have undertaken as a business in the past year to improve ESG implementation and its integration across T. Rowe Price, as well as the companies we work with.
ESG: 2020 IN REVIEW
2020 was another dynamic one on the environmental, social, and governance (ESG) front for T. Rowe Price. Continued expansion of our ESG investment capabilities and a focus on improving ESG data integrity were principal objectives.
We expanded the teams dedicated to ESG analysis and the technology team that supports them. These support the entire research platform, allowing our portfolio managers and analysts to more easily integrate ESG factors to enhance investment decisions. They also facilitated the launch of new products that carry ESG objectives — such as our socially responsible range for European clients.
In 2020, regulators stepped in to help fill the ESG disclosure void in the industry. We welcome more comprehensive and clearer ESG regulation; however, we are concerned about a lack of global alignment. If each country takes a unique approach to ESG regulation, ESG disclosure requirements for asset managers can become misaligned with those required of the underlying securities in their portfolios.
As the industry has moved faster than disclosure regulations, companies have struggled with what and how to disclose. Our message to investee companies is clear:
Inadequate ESG disclosure does not automatically disqualify a company from our investment universe, but it makes it difficult to assess how they are positioned to handle environmental and social pressures — which are more financially material as the world grapples with the challenges of climate change and inequality.
We remain committed to working with our investee companies to improve the quality and quantity of ESG data for our research and analysis, helping to pursue better long-term investment decision-making for our clients.
Last year, I wrote my annual report letter working from home, practicing social distancing — a year later, I am sitting in the same place, but the global ESG landscape feels radically different. The coronavirus pandemic has been a high-impact event that has compelled world leaders and society in general to understand how intertwined economic outcomes are with the prosperity of the planet and the people on it.
Critics of ESG investing have often placed it at odds with financial objectives, so it is interesting that the onset of one of the most economically disruptive events in recent history has acted as a new catalyst for considering environmental, social and governance factors in the investment process.
While ESG investing has been around for a long time, the datasets that underpin it remain relatively nascent. We have seen a dramatic improvement in ESG disclosure levels from corporations (albeit from low levels), but the investment industry is introducing new analytical tools and product offerings at a quick pace. Disclosure standards need to keep up.
In 2020, we made further progress on improving our ESG research platform. We created frameworks within our proprietary Responsible Investing Indicator Model (RIIM) that cover municipal and securitized bond issuers. These complement our existing RIIM frameworks for corporate and sovereign issuers. Additionally, we developed an impact investment framework, which supports our first impact strategy launched in March 2021, and created a framework for analyzing green, social, and sustainability-linked bonds. Lastly, we continued to bolster the number of investment professionals and technology resources dedicated to ESG.
As we progress into 2021, we believe these enhancements can help our investment professionals address the ESG risks and opportunities in their portfolios that the pandemic has propelled into the spotlight more than ever before.
One year ago, as we were composing our 2019 ESG Annual Report, we were in the midst of global market upheaval caused by the coronavirus pandemic. At that time, we predicted:
"Companies’ previous statements about their management of human capital, health and safety, community involvement, and the overall importance of stakeholders to their businesses will be assessed in a whole new context by investors and other stakeholders, and we predict these topics will quickly become central to the engagement that takes place between investors and corporations.”
Looking back now, it is precisely these themes that emerged as some of the most significant in our portfolios, albeit with one very important addition: diversity, equity, and inclusion (DEI).
Our long-standing focus on DEI was amplified following the global wave of protests and activism against systemic racial inequality. For many companies in our portfolios, it was a moment when diversity and inclusion suddenly rose to the top of managements’ priority lists due to a strong mandate from their employees to accelerate the pace of progress. Other companies already had strong DEI programs in place, but felt it was important to focus externally at that moment and address economic inequality in their communities. We observed a continuum of corporate responses to the social outcry, and a deeper discussion of these is included in this report.
Resilience was the core concept underlying most of our engagement discussions in 2020. The global pandemic affected all companies, but in very different ways. For some, it had a devastating effect on their revenues for that fiscal year and beyond.
Others discovered their business models were highly adaptable to the challenges before them. A select few even found that their businesses benefited from the sudden upheaval, such as companies that facilitate remote working, learning, or shopping. Most companies, however, found themselves somewhere in between — struggling during the transition in the second quarter of last year, but showing remarkable recoveries as the second half of 2020 wore on.
As investment professionals, we found ourselves consistently impressed by the flexibility and resourcefulness displayed by many companies over the past year, their concern for the welfare of their employees, and their resolve to balance the interests of multiple stakeholders—executives, employees, investors, customers, and communities — during both the crisis and recovery periods. This intense, and insight-rich, period of engagement was our team’s top priority in 2020.